With the holiday season upon us, it’s easy to become distracted from important year-end tax and administrative responsibilities. In the video below, Dr. Richard Hammar, attorney, CPA, and legal counsel for the Assemblies of God, presents ten critical tasks that churches should address by year's end.
- Housing allowance. Every church board or congregation should designate a housing allowance for 2014 for ministers who own or rent their home (and for ministers who live in a parsonage and who pay some of their housing expenses). If you're a minister, you can figure out your specific housing expenses with the minister’s housing expenses worksheet. Be sure to consult your tax professional or financial advisor as you fill it out. Be aware that a federal court in Wisconsin has ruled that the housing allowance is an unconstitutional preference for religion. This case likely will be appealed, and if so, it may take a year or longer for a federal appeals court to review the case. The implementation of this case has been postponed pending the outcome of any appeal, so churches should continue to designate housing allowances for ministers with the understanding that this benefit eventually may be unavailable.
- W-4 forms. All employees should review their W-4 form and submit a new one if circumstances have changed to ensure accurate tax withholding for the coming year.
- Notice to donors. Donors should be advised not to file their 2013 federal income tax return before they receive their contribution summary from the church for 2013. Donors may not be able to deduct individual contributions of $250 or more if they file a tax return before receiving a contribution summary from their church.
- Christmas gifts. Be sure to correctly handle any Christmas gifts made by the church or congregation to a minister or lay staff member. In most cases, these transfers represent taxable income and not a tax-free gift, and must be reported as income on the recipient’s W-2 form.
A gift of property having a value so small as to make accounting for it unreasonable or administratively impracticable is a nontaxable “de minimis fringe benefit.” This exception does not apply to cash or cash equivalents (i.e. gift certificates).
Gifts made to volunteers are subject to these same rules, except that a church is not required to report these gifts as taxable income to volunteers unless the volunteer receives compensation from the church of $600 or more during the year (in which case the church should issue them a Form 1099).
- Handling end-of-year contributions. The general rule is that a contribution is effective when delivered. This means a check submitted in the church offering in January of 2014 cannot be deducted in 2013 even if it is backdated to 2013. One exception—checks that are mailed and postmarked in 2013 are deductible in 2013 even if not received by the church until 2014.
- Business expenses. If your church reimburses some or all of your employees’ business expenses, reimburse year-end business expenses now. Caution: If you have an accountable reimbursement arrangement, distributing any balance in the reimbursement account to your employees at year-end may make all reimbursements for the year non-accountable.
- Reclassification of workers. Now is the time to decide if you want to reclassify any of your workers for tax reporting purposes. If you have a minister or lay worker who is treated as self-employed for federal income tax reporting purposes and you would like to reclassify the person as an employee, the ideal time to make the change is on January 1 of the new year.
Many churches incorrectly report ministers as employees for Social Security and withhold Social Security and Medicare taxes from their wages. This is incorrect, since the tax code classifies ministers as self-employed for Social Security with respect to services they perform in the exercise of ministry. As a result, they pay the self-employment tax, not Social Security and Medicare taxes. The ideal time to reclassify these ministers as self-employed for Social Security is January 1 of the new year. Consult with a tax professional about correcting any previous misclassification of ministers and lay employees for federal tax reporting purposes.
- Voluntary withholding. Ministers’ wages are exempt from Social Security, Medicare, and federal income tax withholding with respect to services performed in the exercise of their ministry. This means they use the quarterly estimated tax procedure to prepay their federal taxes. Ministers who report their income taxes as employees can enter into a voluntary withholding arrangement with their employing church by submitting a W-4 form to the church treasurer or business administrator. Under such an arrangement, the employing church withholds income taxes as it would for any other employee and also can withhold an additional amount of income taxes to cover the minister’s self-employment tax liability. The ideal time to start voluntary withholding is January 1.
Some churches have filed a Form 8274 with the IRS exempting themselves from the employer’s share of Social Security and Medicare taxes. Lay employees of such churches are treated as self-employed for making quarterly estimated tax payments to the IRS, unless they request voluntary withholding. Under such an arrangement, the church withholds an additional amount of federal income taxes to cover their estimated self-employment tax liability.
- Order IRS tax forms and publications. December is a good time to order your 2014 copy of IRS Publication 15 (withholding tables), and copies of Forms W-2, W-3, 1099, and 1096 that you will be issuing for compensation paid in 2013. Other forms to reorder include W-4, W-9, and 8283. To order forms, simply call the IRS toll-free number 1-800-TAX-FORM (1-800-829-3676). You can also download most forms directly from www.irs.gov.
- Order tax publications and renew subscriptions. If you have not done so already, now is a good time to order the 2014 edition of Dr. Richard Hammar’s Church and Clergy Tax Guide to have for the coming year. To order, call 1-800-222-1840 or visit www.ChurchLawandTax.com.
Please note that AGFinancial is not a law firm and does not provide legal or tax advice. We recommend that you consult a licensed attorney or tax professional regarding all tax-related issues.